When investing in property there are numerous mistakes to avoid. If not recognised or mitigated these mistakes can become quite costly. Many property investors have had to experience these mistakes and deal with the subsequent repercussions. If looking to purchase property it is important to note the following potential mistakes in order to avoid them within your own journey.
Emotional purchasing
When looking for an investment property it is important to avoid emotional purchases. An educated investor understands how to remove their emotions from a deal and focuses purely on the analytics of a property. Becoming emotional during a purchase can lead the investor to spend more on a property without any true rationale behind this decision. Understanding your purchase is solely for investment purposes and keeping a cool head can remove your emotions from a deal. Failure to do so means the investor can become attached to a property and spend more than they should. Owner-occupiers are inherently emotional buyers, investors should not be.
Education
Before even considering purchasing a property, an investor should educate themselves on understanding the basics to property investing. Building a sound understanding of any asset will dictate what level of success the investor has. A lack of knowledge may lead to paying over the odds, purchasing the wrong product, or in the area. Without education, many investors can make purchases they, later on, regret and can stagnate their wealth-building journey. Education should be at the forefront of any successful property investor and will pave the way for future success.
Do your due diligence
When looking at a property deal it is paramount the investor does their due diligence on the property in order to determine if it is a worthwhile investment. Completing your due diligence means researching everything necessary to understand a property as a whole. Understanding as much as possible about a property gives the investor the greatest insight into the property’s true value. Just because the property stacks up numerically does not mean it is a worthwhile investment. In some cases, properties can stack up well on the surface but have underlying issues which can be deal-breakers.
property is a physical asset so needs to be looked at from both a numerical and physical perspective. Some considerations to take into account when considering the physical aspect of a property include the property’s zoning, overlay’s, condition, and surroundings. Some properties may have great prospects but could be in a flood zone or next to a busy round-about with poor access. Looking at the property from as many angles as possible will paint the clearest picture and determine the true value of a property.
Align with your goals
When purchasing a property, it is important to ensure the property aligns with your goals. To a certain extent, the value of a property will be determined by the property’s ability to work towards your goals. One property may not be of value to one investor but could be exactly what another investor is looking for. It is important to understand your goals prior to purchasing to ensure the purchase is serving a purpose.
By creating specific measurable goals an investor can reverse engineer what they are trying to achieve. In doing so, greater clarity is formed around the plan and approach the investor will take. It would seem quite counterintuitive to purchase a property and then try to align this purchase within a strategy. Therefore, the first step in creating a plan is to create goals that outline the purpose of an investor’s journey.
Over-leveraging
When building purchasing a property, the investor should take careful consideration not to over-leverage themselves. Overleveraging occurs when one borrows too much money and can’t afford the repayments on the loan. Currently, interest rates are at a record low so it can be easy to get caught in the idea that holding costs will always remain cheap. When interest rates rise the holding costs of property will increase and require additional funds. Working within your financial means will prevent you from over-leveraging on your investments.
If an investor gets caught out by over-leveraging the repercussions can be extremely costly. Should the holding costs of property exceed an investor’s ability to repay these funds they may be forced to sell. This could mean the investor is required to offload a property quickly to improve cash flow. Placing the investor in a position of desperation, something no investor wants to expose themselves to. Consider using conservative numbers within a cash-flow analysis in order to ensure a property can be held for the long term.
Property spruikers
Within any financial industry, there are so-called “experts” who utilise savvy sales tactics to engage uneducated investors. Within property, these people are commonly referred to as property spruikers. In most cases, these people come across as knowledgeable and use compelling pitches in order to have novice investor use their services. Spruikers can pray on the uneducated and aid in purchasing poor-performing assets. They pose as successful investors who always have some kind of hidden agenda.
In order to spot a spruiker, there are a few things to look out for. Generally, they offer “free” advice and reel investors in with this pitch. They then emphasis the numerous tax depreciation benefits to a property and how they have built a close-knit circle where they can only access these “premium” investment properties. This is all a scam in order to sell new properties with low demand to uneducated investors. An investor should take all information with a grain of salt. Understanding the credibility of the education source will distinguish between recitable experts within property and property spruikers.
Expand your search
Many investors limit themselves to where they are willing to buy based upon where they live. By limiting yourself to your own backyard it hinders an investor from numerous opportunities elsewhere. An investor should develop a mindset of becoming a “borderless” investor where they aren’t limited to a specific state or area based upon their own predetermined agenda. Expanding the search horizon gives a greater chance to find a property that suits the investor’s goal and ambitions. Moreover, given property markets across the country are at different stages of their own cycle, investors can increase the likelihood of seeing short-term growth by purchasing in high potential areas.
Ignore external noise
When it comes to property, most people have their own opinion on the ins and outs of property. It is important to note, just because someone has an opinion does not mean their opinion is valid. Understand that people will give you advice with your best interest at heart but it may be detrimental if applied. The opinions which should be taken on board should only come from investors who have walked the walked or reliable sources which have been proven correct time and time again.
For some reason, when it comes to property people think it can be taken less seriously than any other financial asset. Moreover, because people live in a property they assume their opinion is relevant to property investment. This is far from the truth and any successful investor could tell you this, otherwise, everyone who ever purchased property would be rich. Being able to take opinions with a grain of salt and thinking logically will separate the successful investors from the rest of the pack.
Analysis paralysis
When delving into property many investors can be haltered by their own mentality and ability to pull the trigger. It is important to be cautious, especially when purchasing a property is such an expensive transaction. Education should be taken extremely seriously, however, failing to take any action at all can be just as redundant. Once an investor identifies a property that fits in within their criteria and ambitions, they need to be able to take action. Don’t be caught up by analysis paralysis, failing to take action will result in a 100% chance of failure.
Paying over the odds
Every investor within the property game aims to purchase an asset that over time will grow in value and provide them with an increase in wealth. Purchasing property is different from many other assets due to the fact you can pay over or under the intrinsic value of a property. An owner-occupier might fall in love with a property and pay 10% more than the property’s value. While an investor might pick up a distressed property 10% less than its true worth. It is important to understand a property’s value and be able to avoid paying over the odds. By spending too much on a property it means the investor will be required to wait for the property’s value to meet the purchase price.
Sometimes in a seller’s market investors do pay over the odds to secure a purchase. This can work for an investor who is purchasing in an extremely high-demand market and is confident in future short-term growth. However, willingly paying over the odds vs unknowingly paying over the odds are two different things. If an investor intentionally does this due to the demand of the market it can be rationalised. Though, if it happens out of a lack of education it can become a significant problem. The property deal itself is just as important as finding the right property.
The verdict
There are numerous mistakes that can be made when purchasing an investment property. Making mistakes within property investing can be costly, time-consuming, and extremely detrimental to an investor’s ambition. Identifying common mistakes and being knowledgeable enough to avoid them will put the investor one step closer to success. This list is not exhaustive but will hopefully highlight many common mistakes which can be avoided with the right knowledge and understanding.
